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Asia’s skills crisis
Introduction
Developing Asia has a serious skills gap, as well illustrated by the topic’s
growing frequency in news headlines. The Financial Times in early 2008
suggested that Asia’s growing skills shortages may compel multinational
companies operating in the region to pay Western-level salaries within
5 years to skilled scientists, information and communications technology
(ICT) specialists, and engineers—a staggering claim once one considers
the enormous income gap between the two regions. A few days later
The Economist highlighted an unfolding crisis in the Indian army of a
shortage of 11,000 officers, almost a quarter of requirements—at first
glance, a puzzling situation in a country with a billion-plus population
and a large pool of unemployed youth. But a closer inspection reveals that
there is no puzzle: India has only a small pool of well-educated young
workers, and salary offers from the country’s booming private sector are
often higher than those from the armed forces.
Ironically, developing Asia, home to over two fifths of the global
population, is—in a relatively new phenomenon—suffering from a shortage
of qualified workers. This is not limited to a few hot spots, but is prevalent
enough to present a genuine risk to the region’s long-run growth. Asia
lacks a wide class of occupational skills relevant to a modern economy, and
areas that are critical to growth are seeing large and growing mismatches
between the skills that employers need and the skills that employees have.
Such imbalances are particularly evident among professional groups,
including accountants, airline pilots, business managers, engineers,
lawyers, medical doctors, scientists, and software specialists.
The dearth of skills is manifesting itself in a variety of ways: productivity
losses and idle capital; rising wage costs; increased turnover of sought-after
workers; and higher placement and training costs for new workers. Business
efficiency suffers as a result, and if problems are sufficiently widespread,
whole industries and even entire economies may suffer.
Asia’s skills gap has been widened by increasingly fierce global
competition for skills, stimulated both by technological change and by
a steady reduction in barriers to immigration. (See the chapter Asian
workers on the move, also in Part 2.) Highly qualified professionals
This chapter was written by Donghyun Park of the Economics and Research
Department, ADB, Manila.
62 Asian Development Outlook 2008
in particular have benefited from these trends as industrial countries
welcome them with open arms. Although this “brain drain” is hardly new
to the region, the skills shortage confronting it has added a new, more
urgent dimension to this trend.
This chapter is organized as follows. The next section, Anatomy
of a crisis, looks at the causes, consequences, and likely future trends
in developing Asia’s scarcity of skills. The shortfall stems from Asia’s
economic success, which has fueled the demand for new skills-intensive
goods and services. If not resolved, it may turn into an economywide
bottleneck, seriously holding back growth. The largely structural nature
of the problem precludes any “quick fix.”
Shortages at the sharp end sifts though survey data of employer
perceptions of skills shortages in the region. It is, after all, corporate Asia
that suffers the most—and so is most knowledgeable. These perceptions
confirm that lack of qualified workers is indeed a large and growing
business constraint across Asia and all industries. They also show that the
scarcity is more pronounced for higher-skills levels, emphasizing that it is
the skills that are in short supply, not workers.
Next, Skills shortages in four Asian countries looks at the experiences
of the People’s Republic of China (PRC), India, Malaysia, and Thailand—
two giants and two middle-income economies. With its combination
of explosive economic growth and an education system that can fail
to provide the types of workers that the economy now needs, the PRC
epitomizes Asia’s talent crisis. In India, a looming shortage of talent is
being fueled by the remarkable export success of the country’s ICT sector.
In both Malaysia and Thailand, the failure of the education system to
produce enough skilled people is seriously hampering the countries’
progression to higher value-added industries and activities.
The final section, Easing the bottleneck, looks at policy options,
including short-term measures, such as greater openness to skilled foreign
workers. More fundamentally though, stronger education systems need
to be constructed, which is inevitably a long-term process. Allowing a
greater role for the private sector must be an integral part of any changes
to the education system, but governments will continue to play a key role.
This section also contains some real-world examples of policies that help
mitigate skills shortages.
Anatomy of a crisis
“Skill” is a nebulous concept and difficult to define tightly. Shah and
Burke (2005) propose that “a skill is an ability to perform a productive
task at a certain level of competence.” Skills are akin to the stock of
knowledge and experience necessary to perform a productive task.
Persons who lack them may be unable to carry out specific tasks, or will
be less productive at them. By definition, skills shortages occur when
supply fails to keep pace with demand.
Causes
Developing Asia’s rapid income growth has spawned demand for totally
new goods and services. As incomes rise, consumers typically seek what
they could not afford before—financial and legal services, for example,
Asia’s skills crisis 63
and better health care. And Asia’s deepening integration in the global
economy has gone hand in hand with growing sophistication in the goods
it produces and then sells abroad (ADB 2007a), which requires a larger
pool of skills.
The emerging skills gap is largely a symptom of Asia’s economic
success. The acute shortage of airline pilots in the PRC, for example, is a
direct consequence of the explosive growth in the demand for air travel in
that country, itself a function of fast-climbing incomes. Other factors are
at play, too, including a steady convergence toward international norms
and practices for environmental standards, corporate governance, and
financial regulation. This “upgrading” raises the demand for professional
managers and specialists.
Supply-side factors are also operative. Above all, most education
systems have not geared themselves to emerging needs and are
exacerbating mismatches. The region’s universities have to do more than
produce high numbers of graduates—they have to turn out graduates who
can perform the functions and tasks required by rapidly modernizing
economies.
2.2.1 Top business concerns, People’s
Republic of China, Dec 2006–Jan 2007
Consequences
The immediate symptoms of the skills gap include hard-to-fill vacancies,
high staff turnover, and wage inflation, and reflect a natural response
when demand for particular skills lags their supply. Take the example
of the ICT industry. Firms will compete vigorously to attract and retain
scarce systems analysts and software developers. This bids up wages,
and ICT professionals can increasingly “hop” between firms for a
higher salary. Furthermore, firms may find it increasingly difficult to fill
vacant positions, settling for fewer and less-experienced professionals
than they need. If this process goes on too long, it may crimp business
and investment plans, leading to a fall in productivity, efficiency, and
competitiveness at the firm level.
Firms can sometimes get around any shortfall in skills by investing
more in local workers and developing skills themselves. For example,
when Microsoft outsourced part of its web-based technical support to
one of its joint ventures in the PRC, it hired 10 native-English speakers
from the US to teach local workers about US e-mail protocol and writing
style (McKinsey Global Institute 2005). However, many skills require
long periods of more formal education. Nor is it likely that firms in tight
markets for skills have any incentive to invest in job-hopping workers.
Although firms are in the front line of the skills shortage, the effects
can extend to the economy as a whole. Skills constrictions can retard
economic growth in just the same way as weak infrastructure. This is
particularly true when they surface in the most dynamic sectors that
might, for example, be important sources of foreign exchange (such as
ICT in India), or that have important forward linkages to other sectors
(such as accountancy, legal services, or airline transportation).
Shortage of qualified staff
Corruption
Bureaucracy, red tape, inefficient gov’t
Staff turnover
Lack of legal certainty
Wage inflation
Poor data, market research
Political instability
Intellectual property theft
Inadequate physical infrastructure
Cultural and linguistic differences
Terrorism
Underdev’d banking and financial systems
Future trends
Shortages of workers and skills are typical when growth accelerates. In
order to meet the strong demand for goods and services at those times,
firms may wish to have some workers in reserve, including skilled
Shortage of qualified staff
Bureaucracy, red tape, inefficient gov’t
Staff turnover
Lack of legal certainty
Wage inflation
Poor data, market research
Intellectual property theft
Corruption
Cultural and linguistic differences
Inadequate physical infrastructure
Underdev’d banking and financial systems
Political instability
Terrorism
0
1
2
3
4 5
1 = not an issue; 5 = serious issue.
Source: Staff estimates based on EIU (2007).
2.2.2 Top business concerns, Southeast
Asia, Dec 2006–Jan 2007
0
1
2
3
4
5
4
5
1 = not an issue; 5 = serious issue.
Source: Staff estimates based on EIU (2007).
2.2.3 Top business concerns, India, Dec
2006–Jan 2007
Inadequate physical infrastructure
Bureaucracy, red tape, inefficient gov’t
Wage inflation
Shortage of qualified staff
Lack of legal certainty
Corruption
Staff turnover
Poor data, market research
Intellectual property theft
Cultural and linguistic differences
Terrorism
Political instability
Underdev’d banking and financial systems
0
1
1 = not an issue; 5 = serious issue.
Source: Staff estimates based on EIU (2007).
2
3
64 Asian Development Outlook 2008
workers, accentuating the demand. It seems likely that exceptionally
robust growth both in developing Asia and in the broader global economy
in 2002–2007 exacerbated the situation. Yet there is a significant longterm component to the skills shortages that reflects the fast economic
catch-up of the region and its rapid, ongoing structural transformation.
In addition, most of Asia’s education systems are ill-equipped to meet
modern labor force requirements and many of them have for long been
identified as possible bottlenecks on growth and economic modernization
(ADB 2007b).
Looking ahead, the prospect of a transition toward older populations,
which will begin in the PRC within the next few years and which is
already well under way in the rest of East Asia, as well as of growing
premiums on skills- and knowledge-based activities, suggest that the
skills gap could become wider and more costly. Given the long lead times
involved, policy makers would do well to consider solutions now.
2.2.4 Shortage of qualified staff as an issue,
People’s Republic of China, Dec 2006–Jan
2007
Professional services
Other services
Electronics/engineering
Financial services
Chemicals/pharmaceuticals
Other industrial sectors
ICT services
0
1
2
3
4
5
1 = not an issue; 5 = serious issue.
Source: Staff estimates based on EIU (2007).
Shortages at the sharp end
The previous sections have given a bird’s-eye view of the skills gap
in developing Asia. But how is the effect felt “on the ground,” where
shortages above all represent a practical problem plaguing the everyday
operations and investment plans of Asian companies? It is helpful to
listen to the voice of corporate Asia to get a feel for the dimensions and
depth of the impact. That voice suggests that it is the highly specialized,
professional occupations that lie at the heart of Asia’s skills shortage.
Three firm-level surveys that pick up this voice have been carried out
in the last couple of years, two by the Economist Intelligence Unit (EIU)
and one by the World Bank. The surveys had the broad aim of identifying
the major obstacles to doing business in the region, and provide a
partial—but revealing—profile.
Asia Business Outlook Survey 2007
The EIU carried out its first Asia Business Outlook Survey in December
2006 and January 2007. The survey aimed to identify companies’
performance, business prospects, and key challenges. The respondents
were senior executives of 241 member companies of the EIU’s Corporate
Network in Asia, in seven different industries: about 20% of respondents
were in chemicals/pharmaceuticals; 20% in other services; 18% in other
industrial sectors; 12% in financial services; 12% in professional services;
10% in ICT services; and 8% in electronics/engineering.
The respondents were asked to identify and rank their business
concerns in three “regions” from a list of 13 major issues, ranging from
terrorism to inadequate physical infrastructure to shortage of qualified
staff. The regions were PRC, India, and Southeast Asia (Indonesia,
Malaysia, Philippines, Singapore, Thailand, and Viet Nam). The survey
results indicated that the last issue was the top business concern among the
responding firms in the PRC and Southeast Asia, and the fourth-greatest
concern in India (Figures 2.2.1, 2.2.2, and 2.2.3 above). Two issues relating to
staff shortages, namely wage inflation and staff turnover, also ranked high
in all three regions. These results are consistent with the view that finding
and keeping qualified workers is a daunting challenge for corporate Asia.
2.2.5 Shortage of qualified staff as an issue,
Southeast Asia, Dec 2006–Jan 2007
Financial services
ICT services
Professional services
Electronics/engineering
Other services
Chemicals/pharmaceuticals
Other industrial sectors
0
1
2
3
4
5
1 = not an issue; 5 = serious issue.
Source: Staff estimates based on EIU (2007).
2.2.6 Average wage change during 2007
India
Southeast Asia
China, People's Rep. of
Developing Asia
%
18
12
6
SM
MM
S
SFW
UW
MM = middle managers; S = specialists (finance, ICT);
SFW = skilled factory workers; SM = senior managers;
UW = unskilled workers.
Source: EIU (2008).
0
Asia’s skills crisis 65
Firms in the same seven industries in the PRC and Southeast Asia
were asked whether shortages of qualified staff represented a serious
business issue. The survey results showed that no industry was immune
from these problems (Figures 2.2.4 and 2.2.5), suggesting that constraints
cut across sectors as well as countries.
Asia Business Outlook Survey 2008
The EIU’s second Asia Business Outlook Survey was conducted in
December 2007. In addition to many of the earlier questions, this survey
asked firms how much wages had risen during 2007 for different types
of workers. A clear pattern emerged across all three regions: specialist
workers experienced the biggest pay increase and unskilled workers
the lowest (Figure 2.2.6). Overall, these data lend further support to the
notion that Asia’s labor gap is more pronounced in high-skill occupations.
In addition to suggesting possible shortages, these findings are consistent
with technological change that favors productivity gains by skilled
workers.
Firms were also asked whether shortages of particular types of
workers constituted a serious business constraint. Again, a clear pattern
emerged (Figures 2.2.7, 2.2.8, and 2.2.9): staff shortages were a much
bigger problem among senior managers, middle managers, and specialist
professionals than among skilled factory workers and unskilled workers.
The point bears repeating: Asia is suffering from a shortage of skills, not a
shortage of workers.
World Bank Enterprise Surveys
World Bank Enterprise Surveys (WBESs) collect firm-level data on
the business environment, on various business obstacles as perceived
by firms, and on some productivity measures. They are an integral
component of the World Bank’s Investment Climate Survey research
program, which seeks to assess the investment climate and identify
significant firm-level constraints to investment. The WBESs cover
manufacturing firms mainly and certain services subsectors such as ICT
and tourism. Sample sizes for recent WBESs range from 250 to 1,500
firms. First conducted in 2002, the surveys now cover slightly more than
100 countries, including PRC, India, Malaysia, and Thailand.
In the case of the PRC, separate WBESs were carried out for
manufacturing and services, both in 2002. Manufacturing firms perceive
inadequate skills and education of workers to be the fourth most serious
obstacle to doing business, and services, third, out of 17 potential
obstacles (Figures 2.2.10 and 2.2.11).
WBESs of Indian manufacturing firms were carried out in 2002 and
2005. The results suggest that, although skills shortages are a significant
business constraint for manufacturing in India, it is a less pressing issue
than in the PRC (Figures 2.2.12 and 2.2.13). The results of the 2006 WBES
for India’s ICT sector confirm that skills shortages are less severe in
India than in the PRC, not only in manufacturing but also in services
(Figure 2.2.14). These findings broadly corroborate those in the EIU
surveys.
The 2006 WBES of India’s ICT sector also provides some other
information relevant to skills diagnostics. Over the period 2003–2006,
2.2.7 Staff shortage as a constraint,
People’s Republic of China, Dec 2007
Very major
Very minor
Major
None
Minor
% of firms
100
75
50
25
0
SM
MM
S
SFW
UW
MM = middle managers; S = specialists (finance, ICT);
SFW = skilled factory workers; SM = senior managers;
UW = unskilled workers.
Source: EIU (2008).
2.2.8 Staff shortage as a constraint, India,
Dec 2007
Very major
Very minor
Major
None
Minor
% of firms
100
75
50
25
SM
MM
S
SFW
UW
0
MM = middle managers; S = specialists (finance, ICT);
SFW = skilled factory workers; SM = senior managers;
UW = unskilled workers.
Source: EIU (2008).
2.2.9 Staff shortage as a constraint,
Southeast Asia, Dec 2007
Very major
Very minor
Major
None
Minor
% of firms
100
75
50
25
SM
MM
S
SFW
UW
MM = middle managers; S = specialists (finance, ICT);
SFW = skilled factory workers; SM = senior managers;
UW = unskilled workers.
Source: EIU (2008).
0
66 Asian Development Outlook 2008
2.2.10 Share of firms perceiving an issue
as a major or very severe obstacle in
manufacturing, People’s Republic of China,
2002
Tax rates
Electricity
Regulatory policy uncertainty
Skills and education of workers
Macroeconomic instability
Access to financing
Tax administration
Corruption
Cost of financing
Customs and trade regulations
Transportation
Labor regulations
Anticompetitive/informal practices
Telecommunications
Access to land
Business licensing and permits
Crime, theft, and disorder
2.2.13 Share of firms perceiving an issue
as a major or very severe obstacle in
manufacturing, India, 2005
Electricity
Tax rates
Corruption
Tax administration
Cost of financing
Customs and trade regulations
Access to financing
Skills and education of workers
Labor regulations
Regulatory policy uncertainty
Access to land
Business licensing/permits
Crime, theft, and disorder
Anticompetitive/informal practices
Macroeconomic instability
Transportation
Regulation specific to industry
Legal system/conflict resolution
Telecommunications
Access to foreign technology
0
0
10
20
%
30
40
10
20
%
30
40
Source: Staff estimates based on World Bank (2005a).
Click here for figure data
Source: Staff estimates based on World Bank (2002).
Click here for figure data
2.2.11 Share of firms perceiving an issue as
a major or very severe obstacle in services,
People’s Republic of China, 2002
Tax rates
Regulatory policy uncertainty
Skills and education of workers
Macroeconomic instability
Corruption
Telecommunications
Anticompetitive/informal practices
Tax administration
Electricity
Business licensing and permits
Crime, theft, and disorder
Labor regulations
Cost of financing
Access to financing
Transportation
Customs and trade regulations
Access to land
0
10
20
30
40
50
2.2.14 Share of firms perceiving an issue as
a major or very severe obstacle in ICT, India,
2006
Electricity
Corruption
Road transportation
Tax administration
Regulatory policy uncertainty
Business licensing/permits
Inadequately educated workforce
Tax rates
Telecommunications
Macroeconomic instability
Access to land
Legal protection for data privacy
Availabity and cost of financing
Legal system/conflict resolution
Customs and trade regulations
Access to foreign technology
Labor regulations
Air transportation
0
%
10
20
30
%
Source: Staff estimates based on World Bank (2002).
Source: Staff estimates based on World Bank (2006).
Click here for figure data
Click here for figure data
2.2.12 Share of firms perceiving an issue
as a major or very severe obstacle in
manufacturing, India, 2002
2.2.15 Average wage change in ICT, India,
2003–2006
Corruption
Electricity
Tax rates
Tax administration
Regulatory policy uncertainty
Cost of financing
Access to financing
Anticompetitive/informal practices
Labor regulations
Macroeconomic instability
Crime, theft, and disorder
Business licensing and permits
Customs and trade regulations
Skills and education of workers
Transportation
Access to land
Telecommunications
Small (< 20)
Large (> 100)
Medium (2099)
All
%
50
40
30
20
10
A
B
C
D
E
0
Source: Staff estimates based on World Bank (2002).
A = basic computer skills; B = standard office software;
C = industry specific software; D = hardware and
maintenance; E = programming and application or system
architecture.
Note: Number in parentheses indicates the number of
workers in a firm.
Source: Staff estimates based on World Bank (2006).
Click here for figure data
Click here for figure data
0
10
20
%
30
40
Asia’s skills crisis 67
nominal wages rose by 30% or more for all types of ICT workers,
providing indirect evidence of a skills shortage in ICT (Figure 2.2.15).
Survey results also indicate that Indian ICT firms are experiencing a
widespread shortage of workers with the required skills (Figure 2.2.16). Yet
as filling vacancies does not pose a major challenge for Indian ICT firms
(Figure 2.2.17), the evidence of a skills shortage in this sector is mixed.
WBESs were carried out for manufacturing in Malaysia and Thailand
in 2003 and 2004, respectively. Manufacturers in Malaysia pointed
to inadequate skills and education of workers as the top business
obstacle, while those in Thailand put it second. The results support the
view that in both these middle-income developing countries a lack of
skills is impeding the migration of industry into more technologically
sophisticated industries (Figures 2.2.18 and 2.2.19).
WBES data also provide some information about whether skills
shortages are limited to a few specific types of firms—e.g., large, foreign
multinationals—or are of a more general nature. Survey respondents
are classified in terms of foreign versus domestic ownership, size (as
measured by number of employees), and whether they are exporters or
not. The results of the 2002 WBES of PRC manufacturing suggest that
skills constraints affect all types of firms (Figure 2.2.20).
2.2.16 Share of ICT firms reporting shortage
of workers with required skills, India, 2006
% of firms
50
40
30
20
10
Small
(< 20)
Medium
(2099)
Large
(> 100)
Note: Number in parentheses indicates the number of
workers in a firm.
Source: Staff estimates based on World Bank (2006).
Click here for figure data
2.2.17 Weeks needed to fill most recent
vacancy in ICT, India, 2006
Manager
Professional
Skilled workers
Number of weeks
5
4
Skills shortages in four Asian countries
Skills shortages appear across developing Asia, and feature certain
common drivers, such as globalization and technological progress.
Nevertheless, there are also important differences. To see a more accurate
picture of the challenges facing each country, it is helpful to look at
experiences at this level. This section explores those of four regional
countries—PRC, India, Malaysia, and Thailand. The PRC and India
have been selected for closer scrutiny on the basis of their global and
regional economic importance as well as their phenomenal growth and
rapid integration into the world economy. Malaysia and Thailand offer
examples of middle-income economies that are endeavoring to move
further up the value chain.
People’s Republic of China
Perhaps more than any other country, the PRC epitomizes developing
Asia’s skills crisis. Explosive economic growth, accompanied by rapid
structural transformation and industrial technological upgrading, has
fueled an unrelenting demand for skills. Demand for new services has
added to this pressure. For example, income growth has led to surging
demand for medical services, creating an acute shortage of doctors.
According to The Economist (2007), the PRC had only around 4,000
general practitioners in 2007, but the Government’s urban health care
plan requires no less than 160,000. A burgeoning demand for legal
services, financial services, and leisure is driving the demand for skilled
professionals in those areas.
Blistering expansion of the corporate sector has been behind soaring
investment, seen in factories, machines, and equipment, and in the
professionals and specialists required to run them. The ability to compete
successfully in markets abroad and to provide shareholder value requires
0
3
2
1
0
Small
(< 20)
Medium
(20-99)
Large
(> 100)
All
Note: Number in parentheses indicates the number of
workers in a firm.
Source: Staff estimates based on World Bank (2006).
Click here for figure data
2.2.18 Share of firms perceiving an issue
as a major or very severe obstacle in
manufacturing, Malaysia, 2003
Skills and education of workers
Macroeconomic instability
Regulatory policy uncertainty
Tax rates
Cost of financing
Electricity
Customs and trade regulations
Labor regulations
Access to domestic financing
Tax administration
Corruption
Anticompetitive/informal practices
Transportation
Business licensing and permits
Crime, theft, and disorder
Access to land
Access to foreign financing
Telecommunications
0
10
20
%
Source: World Bank (2005b).
Click here for figure data
30
68 Asian Development Outlook 2008
that businesses, whether domestic or foreign owned, in the PRC meet
demanding production, logistical, safety, and corporate governance
standards, which requires a large pool of higher- and middle-level staff.
While the root cause of the PRC’s skills crisis lies in the leap in
demand for skills, the education system has failed to keep pace. The
system’s main problem has been one of failing to produce the right
kind of graduates rather than too few of them. For example, in 2005,
3.1 million students graduated from its universities, compared with only
1.3 million in the US. In the same year, the PRC produced nearly 10
times as many engineering graduates as the US—over 600,000 versus
only 70,000. One would expect this flow of graduates to be adding to the
large stock of young professionals (9.6 million in 2003) with significant
work experience. The catch is that only a small share of this seemingly
abundant “talent pool” is, indeed, talented enough.
The McKinsey Global Institute (2005) provides an in-depth look at
this failure of quality. According to its study, fewer than 10% of graduates
who are candidates for jobs at foreign multinational companies have the
right skills and qualifications to work there. Poor English is the main
shortcoming, but others, such as engineering graduates who are well
versed in theory but unequipped with practical problem-solving skills, is
another. This matters not only for multinationals themselves but also now
for the growing number of domestic companies that are trying to emulate
and compete with multinationals and that harbor ambitions to become
world-class companies.
The combination of the sheer scale of the PRC’s skills crisis and
its largely structural nature suggests that it may constrain corporate
ambitions for years to come. Skyrocketing demand for professional and
managerial skills is likely to test the skills-producing capacity of even
a world-class education system, and building such a system—or even a
responsive one—is inevitably a long-term process for the PRC. In the
meantime, the country’s attempt to plug its skills gap using foreign
workers is likely to have spillover effects, exacerbating skills shortages
elsewhere in Asia. (Policy options for the four countries, and developing
Asia generally, are given in the section Easing the bottleneck, below.)
India
Many of the same structural factors that are causing skills shortages in
the PRC are also seen in this country: India’s skills gap is a by-product of
its economic success; of corporate governance changes (particularly the
growing role of the private sector); and of globalization (especially foreign
demand for ICT services).
But India’s skills gap is also different. For one, it is expecting a
demographic dividend whereas PRC is facing aging problems of richworld proportions. In addition, some (admittedly tiny) segments of the
Indian education system are better equipped to produce world-class
professional workers. Networks for top establishments such as the Indian
Institute of Management and the Indian Institute of Technology turn out
world-class managerial and technological professionals that are in high
demand both in India and abroad. Although there is a huge gulf between
these two bodies and Indian universities in general, where the relevance
and quality of education are still poor—and indeed, India’s skills and
2.2.19 Share of firms perceiving an issue
as a major or very severe obstacle in
manufacturing, Thailand, 2004
Macroeconomic instability
Skills and education of workers
Regulatory policy uncertainty
Electricity
Tax rates
Tax administration
Anticompetitive/informal practices
Customs and trade regulations
Corruption
Cost of financing
Access to financing
Transportation
Labor regulations
Telecommunications
Crime, theft, and disorder
Business licensing and permits
Access to land
0
10
20
%
30
40
Source: Staff estimates based on World Bank (2004).
Click here for figure data
2.2.20 Share of firms perceiving inadequate
skills and education as a major or very
severe obstacle in manufacturing, People’s
Republic of China, 2002
%
30
25
20
D
F
E
N
S
M
L
15
D = domestic; E = exporter; F = foreign; L = large (> 100);
M = medium (2099); N = nonexporter; S = small (< 20).
Note: Number in parentheses indicates the number of
workers in a firm.
Source: Staff estimates based on World Bank (2002).
Click here for figure data
Asia’s skills crisis 69
labor shortage problems can be traced back to failures in the delivery of
adequate primary schooling—the country has the advantage of hands-on
experience of designing institutions and curricula that meet the changing
needs of the market.
India’s success in training a pool of able, qualified engineers and
managers with English-language skills has helped position India’s
ICT and business process outsourcing (BPO) industries as global
leaders. The National Association of Software and Service Companies
(NASSCOM) and McKinsey estimate that in 2005 the country accounted
for 28% of ICT and BPO skilled workers among 28 low-cost countries
with significant potential in the two industries. But to maintain its
edge, India will require a 2.3 million-strong ICT and BPO workforce
by 2010. Current projections suggest a likely deficit of 500,000 such
workers, foreshadowing a possible contraction in global market share
(NASSCOM-McKinsey 2005).
Though India has a few glittering, world-class education institutions,
it also has many more higher education establishments that fail to
equip students with the skills demanded by the market. Only 25% of
engineering graduates and 10–15% of general graduates have the skills and
qualifications for working in the ICT and BPO industries (NASSCOMMcKinsey 2005). From a microeconomic perspective, the skills gap
matters because it may slow or prevent Indian ICT and BPO firms
from moving into higher value-added segments and activities; from a
macroeconomic perspective, it suggests that these two industries will
be unable to keep up their frenetic pace of expansion. Ironically, they
account for a much larger share of GDP (4.5%) than of the total labor
force (0.15%) (ADB 2007a), yet it may well be constraints in the labor
market that hold them back.
Malaysia and Thailand
Malaysia and Thailand are more advanced along the economic
development curve than the PRC and India: they have higher income and
productivity levels, and have already completed important phases of the
transition to modern industrial and services economies. Equally, their
pace of growth is more sedate. Yet the two Southeast Asian nations also
suffer from skills shortages, partly because competition from cheaper
locations (including the two giants) is compelling them to move further
up the industrial technological ladder and into modern services activities.
An important factor in their skills gaps is that neither country has
invested adequately to ensure that education is relevant.
In Malaysia, the constraint is as much quantity as quality. Given its
relatively small population and labor force, Malaysia has quite a large and
complex economy. But it has been unable to supply skills to keep pace
with demand because graduate numbers are low, and even among these
people, few have the right blend of skills. Udomsaph and Zeufack (2006)
observe that the enrollment and completion rate for higher education in
Malaysia is substantially lower than in countries at similar income levels.
The same study found that a university education brought about a 25%
increase in hourly wages relative to a high school education, which is far
higher than the wage premium in industrial countries. In another study,
Thangavelu and Hu (2006) note that Malaysian graduates tend to have
70 Asian Development Outlook 2008
weak skills in precisely those areas most needed by the type of knowledgebased economy to which Malaysia is directing its efforts to becoming.
Thailand does not suffer from this quantitative graduate shortfall. In
fact, the tertiary education completion rate is slightly above the norm for
countries at similar income levels. But there, too, serious quality problems
mean that a large number of university graduates does not translate into
an adequate supply of managerial and technical workers. According to
Udomsaph and Zeufack (2006), no less than 60% of managers in Thailand
rate the English language skills of their local professional workforce as
poor, and 41% do so for ICT skills. Despite quality gaps, as in Malaysia
university graduates can still command large wage premiums. The same
study finds that university education led to a 35% increase in hourly wages
relative to a high school education.
The tertiary education systems of both these middle-income countries
have done a poor job at producing graduates with relevant skills. The
experiences of both show that while structural change and technological
progress can lead to skills shortages, causation can also be in the opposite
direction. The experiences of Ireland in successfully addressing the skills
gap in the context of large FDI inflows may be particularly relevant for
these two countries (Box 2.2.1).
2.2.1 Aligning the tertiary education system with the needs of industry: Policy lessons from Ireland
Within a generation, rapid growth has transformed Ireland
from a European laggard to a widely admired “Celtic tiger.”
A critical ingredient in the economy’s remarkable success
was large foreign direct investment (FDI), especially into
high-tech industries. Yet by the 1990s, the economy was
facing large and growing skills shortages. In particular,
the number of science and engineering graduates was
insufficient to meet the demands of an increasingly
sophisticated economy.
The central component of Ireland’s response to the
skills shortage was to expand its supply of science and
engineering graduates by realigning its education system
to the changing requirements of industry. Specifically,
the Government adopted the northern European model
of higher education, which recognizes the need for both
technical and traditional university education. As a
consequence, the share of tertiary students at traditional
universities fell from 75% in 1965 to 54% by the late 1990s;
at the same time, the share of tertiary students in vocational
and technological education rose from 2% to 37%.
Ireland’s tertiary education system has thus been
transformed into one that places equal emphasis on
general education and on vocational and technological
training. Besides this shift in tertiary education, the
establishment of regional technical colleges and two
national institutes of higher education has also helped
build up the country’s pool of skilled workers.
The Industrial Development Agency, the main body
in charge of attracting FDI, provides key inputs for
education policy, reflecting the central importance of
FDI in the economy. Those inputs help align the needs of
foreign investors with the output of the education system.
For example, concerned about a looming shortage of
electronics graduates in the 1970s, the Agency lobbied
the Government to expand the education capacity for
technology-related courses. The result was a 40% increase
in the number of engineering graduates and a 10-fold
increase in the number of computer science graduates
between 1978 and 1983.
The key lesson from the Irish experience is that a
flexible and adaptable education policy is critical for
aligning the education system to the needs of industry.
Ireland has gone so far as to revamp the structure of its
tertiary education system to produce graduates who have
the skills required by industry. In fact, the Government
explicitly incorporates industry’s requirements in
formulating and implementing its education policy. The
country’s successful reinvention of itself as a high-tech
economy illustrates the large rewards of a demandbased education system that places a premium on the
effectiveness of graduates in the workplace.
Source: Thangavelu and Hu (2006).
Asia’s skills crisis 71
Easing the bottleneck
Evidence from a range of sources suggests that skills constrictions may
soon limit growth potential across the region. Consequently, improving
the supply and relevance of skills is a vital element in enhancing
national competitiveness. As there are large private gains to be made
from investment in skills, this is not a problem that calls for expansive
public sector financial support. The role of government should lie
more in resolving coordination failures and ensuring that the policy,
regulatory, and other elements of the enabling environment create the
right incentives to encourage the private sector to close the gap and reap
the rewards. Of course, it will also remain government responsibility to
ensure that primary and secondary school systems position the young so
that they can benefit from higher education and training.
The following paragraphs outline some of the main measures for
easing the skills bottleneck, in terms of steps to be taken now, and those
for the long run.
Short-term policy options
While developing Asia’s governments wait for their longer-term
investments in higher education to bear fruit (as discussed in the next
section), they can start with practical short-run measures to help ease
constraints. Many of these aim to allow markets to do a better job at
finding the supply–demand balance for skills.
Many frictions limit the supply of skills. Occupational associations,
for example, may seek to restrict the entry of new entrants into their
professions so as to limit competition and underpin members’ salaries. For
example, bar associations of most countries impose restrictions on lawyers
that have qualified in other countries, and sometimes in other jurisdictions.
Unwarranted occupational barriers—those that are not required to secure
efficient and safe delivery of, say, medical services and that are intended to
protect the position of “insiders”—also cut the pipeline of able university
graduates who may otherwise have chosen to acquire the relevant skills.
The first area of change would therefore be for governments to smooth
these frictions. With political will, this can be initiated quite quickly.
Second, governments can pursue policies that make it easier for
skilled foreign workers to work and live in their countries (see the chapter
Asian workers on the move, also in Part 2). Richer economies embarked
on this path some time ago, and most have immigration regimes favoring
skilled, rather than unskilled, migrants. Singapore is a regional example
of a country successfully overcoming scarcity of skills through policies
that are targeted at foreign workers (Box 2.2.2).
Third, measures to stem or even reverse the “brain drain” would
make sense. The central role of engineers and scientists from the PRC and
India in the creation of Silicon Valley is well known. More recently, gifted
financial professionals working in international centers of finance are now
returning to Asia to help run sovereign wealth funds. Yet this is just the
tip of the iceberg. There are literally millions of qualified Asian graduates
who study abroad and who fail to return. Although opportunities created
by economic growth will tempt some back, other incentives could be
considered. The experience of Taipei,China shows what a more active
approach can achieve (Box 2.2.3).
72 Asian Development Outlook 2008
2.2.2 Importing foreign professionals: Singapore’s foreign talent policy
The city-state of Singapore has become one of the richest
countries in the world on the back of rapid exportoriented industrialization. A defining feature of the
economy is its exceptional economic openness. Extremely
low barriers to trade and investment have been key factors
in the country’s remarkable economic success.
However, what truly sets Singapore apart is its
exceptional openness to foreign workers. NonSingaporeans account for more than a quarter of those
living in the country and around a third of the workforce.
To some extent, this openness is driven by a structural
gap between the workers required by the economy and
the domestic workforce. This explains why Singapore
welcomes not only skilled workers but also unskilled
workers—the latter group in fact forming the vast majority
of the foreign-born workforce.
Nevertheless, the Government makes a sharp
distinction between skilled and unskilled workers from
overseas, and the policy toward them is highly selective
and biased toward those who can add to the country’s
pool of skills.
For example, it is far easier for those with higher
degrees and qualifications to obtain permanent residence.
Also, the Government does much more than merely
welcome foreign professionals who choose to come on
their own. Rather, it has gone out of its way to recruit
“foreign talent,” especially for the industries that it has
targeted as promising.
There is general consensus that the contribution of
skilled foreign workers has been positive and substantial.
That contribution is especially evident in, for example,
highly skills-intensive industries. For example, the young
but thriving biotech industry would probably not even
exist without foreigners, given the original lack of local
biotech capability. Non-Singaporeans have also contributed
substantially to another new but internationally
competitive industry—private banking.
The main lesson from Singapore for other Asian
countries is that competing for and welcoming foreign
professionals can play a key role in resolving skills
shortages. Singapore is extremely active in the increasingly
global marketplace for such people, and succeeding.
These lessons are not only relevant for other
high-income Asian countries with restrictive policies toward
foreign workers, such as Japan and Korea, but also for
middle-income countries, such as Malaysia and Thailand.
Fourth, even in the short run, it may be possible to increase the
number and quality of tertiary graduates, and liberalizing the outbound
higher education market can add to a larger and better pool of skills
and talent. Malaysia and Singapore have pursued such policies in the
past. It is of course important that graduates, especially if they receive
public financial support, have incentives encouraging them to return.
However, the number of students that can benefit from such programs
will be limited not just by fiscal resources but also by students’ language
skills and the quality of their secondary school qualifications. A
complementary approach is to open up the domestic tertiary education
market to reputable foreign universities. This may improve access to
relevant tertiary education at home.
A range of other options may also be worth considering. One would
be to encourage the reentry of highly skilled women into the labor
force. Others include raising the retirement age, and encouraging older
professionals to remain in the workforce even after they have retired. In
many Asian countries, retirement ages are probably set too low. Another
option would be to provide fiscal incentives for firms to provide training
and retraining for their workers. Such subsidies might be economically
justified because firms will often have difficulty in capturing the benefits
of such training as workers leave for new jobs.
However, for many types of skills, on-the-job training and retraining
are no substitute for long periods of more formal education, as discussed
in the next section.
Asia’s skills crisis 73
2.2.3 From brain drain to brain gain: Lessons from Taipei,China
Taipei,China has not been immune to the developingcountry problem of brain drain, or the loss of the welleducated and the highly skilled to industrial countries.
What makes its experiences interesting is its substantial
success in reversing the trend. Local-born emigrants
who have returned home after studying and working
overseas, especially in the United States, have made
significant contributions to the island’s economic growth.
It is also true that growth itself encouraged many skilled
Taipei,China emigrants to return home by creating new
opportunities. This same “homecoming” trend is also now
occurring in the fast-growing economies of the People’s
Republic of China and India.
What make the experiences of Taipei,China special are
the authorities’ active and systematic policies to attract the
locally born currently living overseas, as well as the success
of those policies. Both the authorities and the private
sector began to tap emigrants’ expertise and connections
well before the economy had evolved to a point where
many emigrants began to return home. In the 1970s,
the National Youth Council was set up, to keep track of
skilled emigrants and to link them with local businesses.
The Council would sometimes provide travel support and
temporary jobs for those who returned home.
By far the best-known initiative is the Hsinchu Sciencebased Industrial Park. It was created in 1980 with the goal
of replicating a Silicon Valley-like cluster of high-tech
industries. The authorities provided financial incentives
and infrastructure for companies to locate in the park;
and to attract skilled emigrants, they provided subsidized
Western-style housing and commercial services. The park
has succeeded in attracting both firms and people, and
has become a big commercial success. It has contributed
to the strengthening of research and development
capacity, to industrial restructuring from labor-intensive
to technology-intensive sectors, and more generally, to
economic growth.
The clear lesson is that active government policies can
help reverse a brain drain, although economic growth
will, for any economy, remain the biggest magnet for
those intending to return for good. The combination of
economic growth and a far-sighted policy of viewing
emigrants as a valuable resource has enabled Taipei,China
to turn a brain drain into a brain gain.
The long term: Education reform
Inevitably, the skills gap cannot be closed without the lengthy and
costly process of building a strong, higher education system capable of
providing the qualifications required by a modernizing economy, yet
in most developing Asian countries, the university system is failing to
produce enough graduates with the relevant skills. Although the dearth of
skills is immediate, and the results of education reform are distant, failure
to make this reform—starting now—would extend a short-run, solvable
issue into a long-term, hard-to-eradicate failure.
Although the development of a tertiary education sector should
serve multiple societal goals, some of which will transcend business and
economic needs, addressing the skills gap will require deregulation and
liberalization of the market for higher education. This approach will
likely increase quantity and improve quality by fostering competition.
The private sector should be allowed greater scope to meet expanding
tertiary education needs, sparing public sector resources for other needs
(including financial support for students who do not have the means
to support their own education or who cannot access other sources of
funding). It will, however, be crucial for private universities to be able
to levy fees, thus allowing them an adequate return on their capital
investment. Box 2.2.4 offers a good example of how private sector
provision of tertiary education can produce industry-relevant graduates.
Box 2.2.5 suggests that even more limited forms of private sector
involvement can be useful in producing such workers.
Clear advantages arise if developing Asia opens its higher education
74 Asian Development Outlook 2008
2.2.4 Private sector incubation of skill-intensive universities: Pohang University of Science and Technology, Korea
Korea’s Pohang Iron and Steel Company (POSCO) is one
of the world’s leading steelmakers. Its establishment of the
Pohang University of Science and Technology (POSTECH)
in 1986 is a good example of the private sector taking the
initiative to resolve its skills shortages. POSCO, desperately
short of high-quality scientists and engineers, did
something about it—and extremely well. In a short time,
POSTECH became a top university in Korea, and in 1998
AsiaWeek magazine selected it as the top Asian university
in sciences and engineering. Even though POSCO initially
set up POSTECH out of self-interest, the university
has now become an important source of scientific and
engineering talent for the whole country.
POSTECH’s basic formula for academic success has been
to select a small number of top students, fully support them
(fees, living allowance, etc.), and recruit the best teaching
staff possible. POSTECH initially had nine departments,
and has since added four more. By 2002, it had awarded
around 2,500 undergraduate degrees and 4,000 graduate
degrees. It has a heavy focus on research, hosting eight
research centers and more than 21 affiliated laboratories.
These include the Pohang Accelerator Laboratory, the only
synchrotron light accelerator in the country.
Another notable feature is POSTECH’s active role in
the transfer of technology between academia and industry:
it helped set up the Pohang Technopark Foundation,
with Pohang city council and POSCO, which provides
infrastructure for such transfer. A more specific example
of such transfer is the POSTECH Biotech Center, which
opened in 2003 and is one of the largest in Korea.
market to foreign institutions, since there is a large quality gap between
foreign and local universities: a significant foreign presence may help
raise standards in the domestic sector. Besides, it is likely to take some
time for local institutions to acquire the human resources that will be
required to design and deliver high-quality and relevant curricula.
Government will of course still have the main role to play in building
world-class tertiary education systems. It will need to lead reforms
in the public sector, and set attainable performance standards. It also
2.2.5 Microsoft’s partnerships with universities in the People’s Republic of China
One way for companies to resolve the problem of
highly educated but poorly skilled employees is to work
with universities (a leading source of such workers).
The objective is to better align university curricula
with industry needs. In the People’s Republic of China
(PRC), for example, university education tends to focus
on theoretical knowledge at the expense of practical
application. As a result, many multinationals operating
in the country find that graduates often lack the skills to
perform their jobs.
Microsoft ran into these problems in its software
operations in the PRC. Software projects are team efforts
that require application skills, which PRC university
graduates often lack, more than theoretical knowledge. To
mitigate the skills shortage, it formed partnerships with
four PRC universities to establish software laboratories
where student interns learn practical software-development
skills. More broadly, in June 2002 the company and
the Ministry of Education jointly launched the Great
Wall Plan to formalize and systematize the company’s
cooperation with universities in the country. The areas of
cooperation include talent training, curriculum support,
research cooperation, and academic exchange. Around 40
universities and research organizations have taken part in
the program so far.
In addition to its cooperation with PRC universities,
Microsoft has trained over 10,000 software engineers
and senior program managers for 11 national software
parks through on-site training and e-learning. Finally, in
conjunction with the local software industry, the company
provides training for mid- and high-level personnel to
strengthen the core competitiveness of software companies
with which it works.
Microsoft’s partnership with PRC universities provides
a possible blueprint for public–private partnerships to
resolve skills gaps. PRC universities are primarily public
universities, which still dominate the higher education
systems of many Asian countries. This partnership
involves the provision of resources in exchange for some
influence over the curriculum. The private sector gains a
large supply of skills while the public sector benefits from
better facilities. Producing more employable graduates is
also ultimately in the interests of any university, public or
private.
Asia’s skills crisis 75
has an important role to play in providing an interface between the
private sector and industry: early identification of industry’s needs and
modifications to curricula are one area where coordination is possible,
and government should play a major role in setting standards and
disseminating information on performance (Box 2.2.1 above). Finally, it
will be government responsibility to ensure that both the private and the
public streams in tertiary education are appropriately regulated, especially
with respect to quality control.
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